HEXO gets new $14.00 price target at Beacon Securities

After reporting quarterly results that bested his and the street’s expectations, Beacon Securities analyst Russell Stanley has raised his price target on HEXO Corp. (HEXO Stock Quote, Chart TSX:HEXO).

In a research update to clients today, Stanley maintained his “Buy” rating on HEXO, but raised his one-year price target on the stock from $12.25 to $14.00, implying a return of 73 per cent at the time of publication.

This morning, HEXO reported its Q2, 2019 results. The company lost $4.32-million on revenue of $16.2-million, a topline that was up 144 per cent over the same period last year.

“This is an exciting time for Hexo as we continue to achieve milestones on the way to becoming a top two cannabis company,” CEO Sebastien St-Louis said. “This quarter not only saw an exponential increase in gross revenue and production, but also saw us continue to execute on our promises including reaching a construction and licensing milestone on our one-million-square-foot greenhouse expansion and listing on the New York Stock Exchange. Just yesterday, we announced an agreement to acquire Newstrike Brands Ltd. Hexo’s future is very promising, I am looking forward to continually driving shareholder value and achieving milestones with our team.”

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Stanley says HEXO is the first major Canadian LP to issue formal revenue guidance.

“Earlier today, HEXO reported quarterly results that beat our forecast as well as consensus, driven by stronger than expected sales volumes and realized pricing,” the analyst says. “This was preceded by yesterday’s announced plan to acquire Newstrike Brands for $263M in stock, at which point the company guided to F2020 gross revenue of $479M, or $400M net of excise taxes. HEXO has also guided to a flat Q3/19 as Building 9 ramps up (1st harvest this month), with Q4/19 doubling Q2/19 revenue levels. This drove a reduction in our F2019 revenue estimate from $101M to $60M. We have increased our F2020 gross revenue estimate from $316M to $450M (a little shy of guidance). We continue to value HEXO using a 23x EV/C2020E EBITDA multiple, so the increase in target price is entirely estimate-driven. While the revenue guidance prompted a 43% increase in our revenue estimate, our target increase is a comparatively modest 14%, reflecting the fact that our forecast is now more back-end loaded.”

Stanley thinks HEXO will post Adjusted EBITDA of negative $21.3-million on revenue of $59.5-million in fiscal 2019. He expects those numbers will improve to EBITDA of positive $151.5-million on a topline of $450.0-million the following year.

“HEXO now trades at approximately 13x EV/C2020E EBITDA based on our revised estimates,” the analyst adds. “This represents an 63% discount to the average amongst cannabis companies with a C$1B+ market capitalization, and a 78% discount to the 58x average that US-listed cannabis companies trade at. Potential catalysts include closing of the HIP acquisition (HEXO management predicts that within 60 days), additional partnership and/or product development news, and the Q3/19 results in June (though as noted, management guided to a flat quarter).”